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Why the 1996 Telecom Act’s Unbundling Model is Obsolete

Scott Cleland

Scott Cleland is Chairman of NetCompetition® a pro-competition e-forum supported by broadband interests and President of Precursor LLC, a research consultancy for Fortune 500 companies. He is author of the book: Search & Destroy Why You Can’t Trust Google Inc.

The genius of the 1996 Telecom Act was that it realized the future was a transition from monopoly telecommunications to communications competition.

The folly of the ’96 Telecom Act was first assuming incorrectly that the future was a just a transition from an analog technology monopoly to analog unbundled network resale competition — not to digital-technology competition, and second assuming incorrectly that the transition to competition would never end in a fully competitive market that no longer needed legacy monopoly regulation.

Simply, the 1996 Telecom Act’s core technology and competition assumptions turned out to be dead wrong, which means current unbundling-competition law is obsolete.

Technology developed completely differently over the last sixteen years than the 1996 Act anticipated — analog communications technology has been supplanted by digital communications technology — hence communications competition has developed completely differently than anticipated.

After a disastrous initial four years of implementing the 1996 Telecom Act, during which the FCC imagined it could make virtually every market decision by itself, and which resulted in a trillion dollar fiber market bubble and in mass bankruptcy for the local CLEC industry, digital and Internet technologies went on to enable real facilities-based competition from 2002-forward — literally out of the ashes of the failed telecom unbundling experiment.

Digital and Internet technology made analog unbundling competition obsolete because these digital Internet protocol technologies effectively leveled the competitive playing field by enabling every single-service communications technology — telecom, cable, satellite, and cellular — the capability to provide similar and complete digital IP data, voice and video functionality to users. Voice and video are no longer analog services; digital technology made them apps!

By design, digital IP networks are seamlessly integrated via software, not hardware, so they simply can’t be physically unbundled like 1996 analog hardware communications networks technically could be unbundled. Today’s competitors no longer need access to a physical analog network element or regulated interconnection agreements to access a single public network, they need only to negotiate peering agreements with a wide variety of peering choices in the Internet’s network of networks, in order to gain access to the entire Internet, its complete network of networks and all of its content.

In digital IP competition, the value is in optimizing the technology facility and network assets one has to offer a differentiated package of products, services, features, applications and content.

However, if the FCC were to force obsolete analog unbundling on a digital IP optimized network — as many net neutrality activists like Professor Susan Crawford and FreePress advocate — it would be highly counterproductive for competition and foster a dysfunctional competitive dynamic.

Perversely, this is exactly what pro-regulatory, net neutrality activists want — to sabotage competition policy with unworkable Rube Goldberg requirements — so they can declare that competition can’t work and force a return to legacy “Title II,” common-carrier regulation of broadband and better achieve their goal of an Internet commons.

Today with digital Internet competition, smart-phone, tablet, and laptop users can gain access to the Internet with a click using a wireless or wire-line provider, or one of many free WiFi networks. The 1996 Telecom Act approach of analog network unbundling has proved to be a totally unnecessary “Rube Goldberg” regulatory process that software engineers have made obsolete via successive technology innovations that obviate the need for government involvement.

Why does digital Internet competition so outperform analog unbundling competition? Since the 1996 Telecom Act, successive Moore’s Law cycles have made microchips (modems, routers and devices) ~1,000 times more powerful than before!

With that much processing power, the economics of communications have completely transformed from the natural monopoly economics of an analog public switched network (PSTN) and analog unbundling thinking, to competitive digital economics, where the ever-increasing processing power of Moore’s law and spectral efficiency from Cooper’s Law fuel compression technology advancements that at bottom allow the same spectrum to do ever-increasingly more throughput.

Unlike analog electronic signals that have physical limits, digital electronic signals can carry ever-increasing throughput, which in turn enables ever-increasing network efficiency, functionality and applications, which in turn enables more competitive differentiation, value, and business model innovation — in a word more competition.

Thus, communications no longer needs government regulation of prices, terms and conditions, because the constantly increasing performance of digital technology inherently fuels competition.

The transition to competition that the Telecom Act envisioned has happened, just not the way Congress expected. This means that the 1996 Telecom Act’s transitional purpose is done and that its continued incorrect focus on implementing obsolete competition policies is counterproductive and dysfunctional.

Congress should sunset the obsolete 1996 Telecom Act soonest. With Moore’s Law, the same communications technology can continuously do more into the future.

Scott Cleland is Chairman of NetCompetition® a pro-competition e-forum supported by broadband interests and President of Precursor LLC, a research consultancy for Fortune 500 companies. In the George H.W. Bush Administration, Cleland served as United States Deputy Coordinator for International Communications and Information Policy.